A Proposed Mapping to Key Article Distinctions - Framework based on MSCI Client Feedback

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A Proposed Mapping to Key Article Distinctions - Framework based on MSCI Client Feedback
A Proposed Mapping to Key
Article 6 / 8 / 9 Distinctions -
Framework based on MSCI
Client Feedback
OVERVIEW AND ANALYSIS OF MSCI ESG INDEXES
BASED ON A SET OF ASSUMPTIONS DISCUSSED
WITH INVESTORS

March 2021

                                                                                     © 2021 MSCI Inc. All rights reserved.
                                                               Please refer to the disclaimer at the end of this document.
                         Information Classification: GENERAL
A Proposed Mapping to Key Article Distinctions - Framework based on MSCI Client Feedback
Introduction

• As part of the EU Financing Sustainable Growth Action Plan, the EU Sustainable Finance
  Disclosure Regulation (SFDR) was established to lay down harmonized rules for financial
  market participants and financial advisers on transparency with regard to the integration
  of sustainability risks and the consideration of adverse sustainability impacts in their
  processes and the provision of sustainability‐related information with respect to financial
  products.
• Apart from the disclosure requirements, funds promoted as ESG are required to classify as
  being Article 8 or 9 products, depending on whether they meet the requirements for either
  classification, with Article 9 taking on more restrictive criteria.
• This deck lays out a proposed mapping to key Article 6, 8, and 9 distinctions, which
  includes an overview of select MSCI ESG Indexes and how they compare against a set of
  assumptions based on MSCI analysis and inputs from industry participants who were
  involved in MSCI’s client engagement initiatives. This deck has been updated to reflect the
  Joint ESA’s Final Report on the draft Regulatory Technical Standards (RTS) regarding the
  disclosure requirements of the SFDR dated February 2, 2021.

                                      Information Classification: GENERAL
A Proposed Mapping to Key Article Distinctions - Framework based on MSCI Client Feedback
Disclaimer

The information found on this deck is provided to help guide thinking
around the approach for Article 6, 8 and 9 products under the EU
Sustainable Finance Disclosure Regulation (SFDR). The information is
provided “as is” and does not constitute legal advice or binding
interpretations of the SFDR. MSCI’s proposed approach to the key SFDR
distinctions are based on assumptions and client feedback as explained in
this deck. Any designations of your Article 6, 8, and/or 9 products and
interpretations of key SFDR distinctions/terms are the responsibility of
financial market participants and should be discussed with your own legal
counsel and your national competent authority as needed..

                             Information Classification: GENERAL
Sustainable Finance Disclosure Regulation (SFDR)
                                                                                   Entity Level*                                                                                                                                         Product Level*
Financial market participants** (FMPs) must disclose:                                                          Financial advisors must disclose:                                                                     FMPs must disclose:
On their websites,                                                                                             On their websites, information on integration of                                                      On their website, information on
• Information on the integration of sustainability risks in their                                              sustainability risks (including principal adverse                                                     products pursuing sustainable
  investment decision-making process (and if not relevant, why)                                                sustainability impacts) in their investment advice or                                                 objectives (Article 9 products) or
                                                                                                               insurance advice on their websites (and if not                                                        promoting E&S characteristics (Article 8
• When “principal adverse sustainability impacts” are being                                                    relevant, why)                                                                                        products)
  considered, statements with their due diligence policies (and if
  not relevant, why) (Compulsory for firms with 500+ employees)                                                In pre-contractual disclosures                                                                        In periodic reports (e.g., annual reports)
                                                                                                               (and if not relevant, why):                                                                           information how sustainable objectives
• Principal adverse impacts statement (Annex I)                                                                                                                                                                      or E&S characteristics are met
                                                                                                               • How sustainability risks are integrated into their
In pre-contractual disclosures (and if not relevant, why):                                                       investment or insurance advice                                                                      (Also note requirements + separate
• Manner in which sustainability risks are integrated into their                                               • The result of the assessment of the likely impacts                                                  timing on principal adverse
  investment decisions                                                                                           of sustainability risks on the returns of the financial                                             sustainability impacts)
• Likely impacts of sustainability risks on the returns of the                                                   products
  financial products

    9 December 2019                           1 September 2020                                               February 2021                                    Q2-Q3 2021 or later                                             Between March 2021 &
  Regulation published                 Close of European Supervisory                                    Final report on draft RTS                     Final DAs on the RTS expected to be                                          June 2023
  in the Official Journal          Authorities (ESAs) consultation on draft                                published by ESAs                            adopted by the Commission and                                            compliance due
                                    regulatory technical standards (RTS)                                                                            published in the OJ (likely in Q2-Q3 2021)

                      This is provided for informational purposes only and does not constitute legal advice. Timetables may change according to the EU legislative process.

                      *Principles-based disclosures were due starting March 10, 2021; prescriptive disclosures (e.g. principal adverse impact statement/product templates) as well as the reference period starts January 1, 2022 with the first reporting due in June 2023

                      **e.g. AIFMs; investment firms providing portfolio management; institutions for occupational retirement provision; and UCITS management companies.
                                                                                                                                                                                                                                                                              4
                                                                                                          Information Classification: GENERAL
Rationale for the Framework

• Following the publication of the SFDR draft regulatory technical standards (RTS), MSCI conducted
  a series of client engagement initiatives:
    – Four workshops in August 2020 attended by 66 clients mostly based in EMEA.
    – One-on-one discussions with key ESG / ESG index clients in the second half of 2020
    – Online survey sent to 900 clients
• Key Highlights:
    – Clients expressed strong interest for a framework to help them classify their ESG funds
    – Clients consider Article 8 as funds integrating ESG considerations and being more focused on
      financial materiality, while Article 9 funds are seen as more focused on sustainable economic
      activities/impact and/or aim to reduce carbon emissions in line with the Paris Agreement
    – There was a consensus on using proxies for defining good governance practices, as well as on
      using UNGC or norms-based exclusions as a minimum prerequisite.
• Based on the multiple client engagement efforts, we derived a set of assumptions / proxies used
  to measure MSCI ESG Indexes against key distinguishing features of Article 8 and 9 products.
• We have further modified the framework to reflect the Joint ESA’s Final Report on the draft RTS
  dated February 2, 2021.

                                         Information Classification: GENERAL
What are Article 8 and Article 9 products as per SFDR?

Article 8                                                       Article 9
• Promotes environmental or social                              • Must have a sustainable investment objective
  characteristics, or a combination                                  o Economic activities that contribute to an environmental
                                                                       objective
                                                                            ▪ Key resource efficiency indicators (use of energy,
                                                                              renewable energy, raw materials, water and land,
                                                                              production of waste, GHG emissions, impact on
                                                                              biodiversity and circular economy)
                                                                     o (or) Economic activities that contribute to a social objective
                                                                            ▪ Tackle inequality or foster social cohesion
                                                                            ▪ Social integration and labor relations
• Must have good governance practices                                       ▪ Investment in human capital or economically or socially
 (sound management structures, employee                                       disadvantaged communities
 relations, staff remuneration, tax compliance)                      o DNSH principle (OECD, UNGPBHR, ILO, IBHR) AND principal
                                                                       adverse impact indicators (14+) to be taken into account
                                                                     o Follow good governance practices, in particular with respect
                                                                       to sound management structures, employee relations, staff
                                                                       remuneration, tax compliance

              Source: https://www.esma.europa.eu/press-news/esma-news/esas-consult-environmental-social-and-governance-disclosure-rules   6
                                                         Information Classification: GENERAL
Article 8 Key Distinctions
POST-ENGAGEMENT INTERPRETATION OF ENVIRONMENTAL OR SOCIAL
CHARACTERISTICS + GOOD GOVERNANCE PRACTICES

                        Information Classification: GENERAL
Article 8 Product Key Distinctions
based on client feedback

        Environmental Characteristics                           Depending on the index objective,
                                                                measurement varies†. Examples:
                                                                 Climate-based exclusions
                                                                 Child labor score
          (or) Social Characteristics                            ESG ratings or score
                                                                † For exclusions-based approaches, proven
                                                                material rate of exclusion is necessary

                                                                Should have at minimum:
        Good Governance Practices                               Overall ESG Controversy

                               Information Classification: GENERAL                                          8
Background on MSCI ESG Indexes: environmental and social
data inputs
MSCI ESG Indexes use MSCI ESG Research definitions and data sets to identify positive and
negative contribution to environmental and social issues through products and services, as
well as to select and/or exclude based on their contribution through operations.
      SCREENING                       ESG CONTROVERSIES                         ESG RATINGS
ENVIRONMENT            SOCIAL

 Thermal Coal
                      Tobacco
    Mining

                   Controversial
O&G Extraction
                    Weapons

  Fossil Fuel
                  Civilian Firearms
   Reserves

 Thermal Coal
                       GMO
    Power

                       Adult
Oil & Gas Power
                   Entertainment

   Palm Oil          Gambling

    Other              Other

                                          Information Classification: GENERAL                 9
Examples of MSCI ESG Indexes using environmental or
social data inputs
Some MSCI ESG Indexes were created with specific Environmental or Social themes, while
many others take on a broader approach to incorporate combined Environmental (E) and
Social (S) or ESG considerations.

        Low Carbon Leaders             Women’s Leadership                       SRI
         Low Carbon Target          Japan Empowering Women                  ESG Leaders
   Carbon and Potential Emissions        Gender Diversity                    ESG Focus
                                                                           ESG Universal
          Climate Change                                                   ESG Screened
   Climate Transition Benchmark                                             ESG Ratings
       Low Carbon Transition

                                     Information Classification: GENERAL                   10
Background on MSCI ESG Indexes:
addressing governance risks
• MSCI ESG Indexes, unless focused on
  specific themes, generally address both the                                              Reduce
  downside (e.g., headline risks) and upside                                               Downside
  (e.g., ESG best-in-class) to provide a holistic
  ESG approach.
    – Reduction of downside risks is done by
      excluding worst offenders based on MSCI ESG
      Controversies, or securities assessed as
      having Red Flags (Very Severe / Score of 0); as
      well as based on MSCI ESG Ratings, or
      securities rated CCCs.
    – Maximizing upside is done by selecting top                                Maximize
      25% or 50% by sector using MSCI ESG Ratings                                 Upside
      data, or by tilting weights in favor of better
      ESG performers in terms of their industry-
      specific ESG risks.

                                          Information Classification: GENERAL                         11
Good Governance Practices Proxy
based on client feedback

                                            ESG CONTROVERSIES                                                ESG RATINGS
Key areas of good
                                             SOCIAL PILLAR                           GOVERNANCE
                                                                                                                    Board
                          HUMAN RIGHTS                                                                  Corporate   Pay
governance
                                             LABOR RIGHTS &
                         AND COMMUNITY                            CUSTOMERS          GOVERNANCE
                             IMPACT
                                              SUPPLY CHAIN
                                                                                                       Governance   Ownership
                                                                                                                    Accounting
practices                Impact on Local
                          Communities
                                               Child Labor
                                                                Product Safety &
                                                                    Quality
                                                                                     Bribery & Fraud
                                                                                                                    Business Ethics
•   Sound                 Human Rights
                                                Collective
                                                                Anticompetitive      Controversial
                                                                                                       Corporate    Anti-competitive Practices
                                               Bargaining &                                                         Corruption & Instability
    management              Concerns
                                                 Unions
                                                                   Practices         Investments       Behavior     Financial System Instability
                                                                                                                    Tax Transparency
    structures            Civil Liberties
                                             Discrimination &
                                                Workforce
                                                                   Customer
                                                                   Relations
                                                                                      Governance
                                                                                       Structures
                                                 Diversity                                                          Labor Management
•   Employee relations                           Labor
                                                                                                        Human       Health & Safety
                                                                  Marketing &                                       Human Capital Development
•   Staff remuneration        Other            Management
                                                Relations
                                                                  Advertising
                                                                                         Other          Capital     Supply Chain Labor Standards

•   Tax compliance                            Supply Chain
                                             Labor Standards
                                                                 Privacy & Data
                                                                    Security        Not covered        Depending on industries’ material
                                                                                     by UNGC           risks, Labor Management or HCD
                                              Health & Safety        Other            screen                may not be incorporated

                                                  Other

                                              Information Classification: GENERAL
Article 9 Key Distinctions
POST-ENGAGEMENT INTERPRETATION OF SUSTAINABLE INVESTMENT
OBJECTIVE

                        Information Classification: GENERAL
Article 9 Product Key Distinctions
based on client feedback

                                                                   Depending on the index objective,
        Environmental Objective                                    measurement varies but should be in line
                                                                   with themes consistent with Article 2(17)
                                                                   and Article 9(3):
                                                                    Environmental Impact
          (or) Social Objective                                     Paris Agreement Alignment
                                                                    Social Impact

                                                                   Should have at minimum:
        Good Governance Practices                                  Overall ESG Controversy

                                  Information Classification: GENERAL                                          14
Interpreting Sustainable Investment Objective based on client feedback
 Article 2(17): ‘sustainable investment’ means an
 investment in an economic activity that contributes
 to an environmental objective, as measured, for                                Since the definition is currently not
 example, by key resource efficiency indicators on the use of                   linked to the EU Taxonomy, a potential
 energy, renewable energy, raw materials, water and land, on
 the production of waste, and greenhouse gas emissions, or
                                                                                approach is to use metrics to
 on its impact on biodiversity and the circular economy, or                     indicatively provide economic activities
 an investment in an economic activity that                                     that contribute to an environmental or
 contributes to a social objective, in particular an                            social objective that capture
 investment that contributes to tackling inequality or that                     conceptually similar key resource
 fosters social cohesion, social integration and labour                         indicators or social themes
 relations, or an investment in human capital or economically
 or socially disadvantaged communities, provided that
 such investments do not significantly harm any of                              Controversies* to represent DNSH
 those objectives and that the investee companies
 follow good governance practices, in particular with                           Proxy used to capture conceptually
 respect to sound management structures, employee
 relations, remuneration of staff and tax compliance;                           similar good governance practices

               * In line with MSCI ESG Research’s EU Taxonomy Screening Guide
                                                 Information Classification: GENERAL
Interpreting Sustainable Investment Objective based on client feedback

Article 9(3): Where a financial product has a reduction in                      Although sustainable investment
carbon emissions as its objective, the information to                           objective specifies “key economic
be disclosed pursuant to Article 6(1) and (3) shall                             activities”, it also specifies that Paris-
include the objective of low carbon emission                                    aligned carbon emissions reduction as
exposure in view of achieving the long‐ term global                             one of the objectives that would meet
warming objectives of the Paris Agreement.
                                                                                Article 9 requirements.
By way of derogation from paragraph 2 of this Article,
where no EU Climate Transition Benchmark or EU                                    Proof of
Paris‐aligned Benchmark in accordance with Regulation
(EU) 2016/1011 of the European Parliament and of the
                                                                                  concept:
Council (20) is available, the information referred to in                         MSCI
Article 6 shall include a detailed explanation of how the                         Climate
continued effort of attaining the objective of reducing                           Paris
carbon emissions is ensured in view of achieving the                              Aligned
long‐term global warming objectives of the Paris
Agreement.

                                                 Information Classification: GENERAL
Sustainable Investment: Environmental Objective Proxy
based on client feedback
                                                                           SUSTAINABLE IMPACT METRICS
  Economic activities as measured by
  key resource efficiency indicators
  •   Use of energy
  •   Renewable energy
  •   Raw materials
  •   Water and land
  •   Production of waste
  •   GHG Emissions
  •   Impact on biodiversity and circular
      economy

  Examples of indexes that aim to meet similar environmental objectives:
        ACWI Sustainable Impact, Global Environment, Climate Paris Aligned

                                            Information Classification: GENERAL
Sustainable Investment: Social Objective Proxy
based on client feedback
                                                                        SUSTAINABLE IMPACT METRICS
  Economic activities that
  contribute to key social themes
  •   Tackle inequality or foster social
      cohesion
  •   Social integration and labor
      relations
  •   Investment in human capital or
      economically or socially
      disadvantaged communities

  Examples of indexes that aim to meet similar social objectives:
                                     ACWI Sustainable Impact

                                           Information Classification: GENERAL
Sustainable Investment: Do No Significant Harm Proxy
based on client feedback

• While the SFDR references Do No
  Significant Harm Principle, there                         EXCERPT FROM THE EU
  is no definition yet. To arrive at a                      TAXONOMY SCREENING GUIDE:
  proxy, we follow MSCI ESG                                 Very Severe (Red Flag) and Severe structural (Orange
  Research’s EU Taxonomy                                    Flag) environmental controversies based on the MSCI ESG
  Screening Guide, which uses Red                           Controversy Methodology present a clear indication of
  and Orange Flags for                                      companies’ violation of standards and norms with
                                                            significant adverse impact on the environment.
  Environment Controversies.
                                                             Every controversy is examined based on the nature of
• Similarly, because Sustainable                               impact (minimal to very serious harm), scale of impact
  Investment includes social                                   (low to extremely widespread), extenuating and
                                                               exacerbating circumstances, and structural or
  objectives, we follow the same
                                                               idiosyncratic nature of the case.
  principle but use Red and Orange                           The overall assessment is represented in a form of a
  Flags for Social Controversies if                            score (0 representing involvement in Very Severe cases,
  the methodology refers to a                                  10 indicating no involvement in controversies) and a
  social theme or issue.                                       corresponding flag (Red, Orange, yellow, and Green).

                                         Information Classification: GENERAL                                             19
MSCI ESG Indexes vis-à-vis the Principal Adverse Sustainability
Impact (PASI)
                        Adverse Sustainability Indicator
                                                                                            Most MSCI ESG indexes already incorporate
GHG emissions
                                                                                            one or more PASI metrics, albeit with nuances
Carbon footprint                                                                            in metric definitions and/or calculations. They
GHG intensity                                                                               are incorporated either comprehensively or
Exposure to companies active in the fossil fuel sector                                      partially, and either as a direct input or indirectly
Share of non-renewable energy consumption and production                                    through the ESG Ratings framework. However,
                                                                                            given that there is no further guidance in ESA’s
Energy consumption intensity per high impact climate sector
                                                                                            Final Report on the draft RTS, MSCI cannot
Activities negatively affecting biodiversity-sensitive areas
                                                                                            determine the extent of incorporation needed or
Emissions to water                                                                          calculate any minimum threshold for reduction
Hazardous waste ratio                                                                       or improvement, from which to form the basis
Violations of UNGC principles and OECD Guidelines for Multinational Enterprises             of potential methodological changes.
Lack of processes and compliance mechanisms to monitor compliance with                      To illustrate how frequently used ESG factors or
UNGC principles and OECD Guidelines for Multinational Enterprises
                                                                                            screens provided by MSCI ESG Research and
Unadjusted gender pay gap                                                                   applied as described in MSCI ESG index
Board gender diversity                                                                      methodologies may align to facets of PASI metrics,
                                                                                            an indicative mapping is available to clients through
Exposure to controversial weapons (anti-personnel mines, cluster munitions,
chemical weapons and biological weapons)                                                    the MSCI Client Support site.

                   Note: Highlighted are examples of PASI metrics that MSCI ESG indexes incorporate.
                                                               Information Classification: GENERAL                                                  20
Good Governance Practices Proxy
based on client feedback

                                            ESG CONTROVERSIES                                                ESG RATINGS
Key areas of good
                                             SOCIAL PILLAR                           GOVERNANCE
                                                                                                                    Board
                          HUMAN RIGHTS                                                                  Corporate   Pay
governance
                                             LABOR RIGHTS &
                         AND COMMUNITY                            CUSTOMERS          GOVERNANCE
                             IMPACT
                                              SUPPLY CHAIN
                                                                                                       Governance   Ownership
                                                                                                                    Accounting
practices                Impact on Local
                          Communities
                                               Child Labor
                                                                Product Safety &
                                                                    Quality
                                                                                     Bribery & Fraud
                                                                                                                    Business Ethics
•   Sound                 Human Rights
                                                Collective
                                                                Anticompetitive      Controversial
                                                                                                       Corporate    Anti-competitive Practices
                                               Bargaining &                                                         Corruption & Instability
    management              Concerns
                                                 Unions
                                                                   Practices         Investments       Behavior     Financial System Instability
                                                                                                                    Tax Transparency
    structures            Civil Liberties
                                             Discrimination &
                                                Workforce
                                                                   Customer
                                                                   Relations
                                                                                      Governance
                                                                                       Structures
                                                 Diversity                                                          Labor Management
•   Employee relations                           Labor
                                                                                                        Human       Health & Safety
                                                                  Marketing &                                       Human Capital Development
•   Staff remuneration        Other            Management
                                                Relations
                                                                  Advertising
                                                                                         Other          Capital     Supply Chain Labor Standards

•   Tax compliance                            Supply Chain
                                             Labor Standards
                                                                 Privacy & Data
                                                                    Security        Not covered        Depending on industries’ material
                                                                                     by UNGC           risks, Labor Management or HCD
                                              Health & Safety        Other            screen                may not be incorporated

                                                  Other

                                              Information Classification: GENERAL
Mapping MSCI ESG
Indexes to the Article 6,
8, and 9 key distinctions
COMPARING MSCI ESG INDEXES AGAINST THE IDENTIFIED SET OF
INDICATIVE MEASUREMENT PARAMETERS

                          Information Classification: GENERAL
Details on approach to comparing MSCI ESG Indexes
based on client feedback explained in previous sections

                E, S AND G CONSIDERATIONS IN METHODOLOGY                                            Does it take into consideration Art. 6/8/9 key distinctions?
                                                                                Governance              Article 6 Key             Article 8 Key                   Article 9 Key
   Index      Environment Data Inputs             Social Data Inputs
                                                                                Data Inputs             Distinctions              Distinctions                    Distinctions

                                              • Values-based                   • Controversy
              • Climate exclusions                                                                                            E/S                        ❑   Sustainable Objective
SRI                                             exclusions                       exclusion
              • Controversy exclusion                                                                  E/S                    Characteristics            ❑   DNSH
ESG Leaders                                   • Controversy exclusion          • Ratings
              • Ratings exclusion &                                                                     Safeguards           ❑ DNSH                       ❖   PASI
ESG Focus                                     • Ratings exclusion &              exclusion &
                selection                                                                                                     Good Governance               Good Governance
                                                selection                        selection

                 The ESG inputs to the methodologies are                                                 Indicates whether the methodology inputs
               listed under their respective columns as per                                            appear to be consistent with key distinctions of
                MSCI ESG Research classification of what                                                Article 6/8/9 based on assumptions/ proxies.
              constitutes as E, S, and G, while distinguishing                                         DNSH is crossed off for methodologies that do
                      between exclusion or selection.                                                  not incorporate inputs that are associated with
                                                                                                        “making sustainable investments”, while PASI
                                                                                                              is not incorporated in the analysis.
                                                                                                      Note: For the descriptions of key concepts referenced, please refer to Slide 25.

              The information is provided “as is” and does not constitute legal advice or binding interpretations of the SFDR. MSCI’s proposed approach to the key SFDR distinctions are
              based on assumptions and client feedback as explained in this deck. Any designations of your Article 6, 8, and/or 9 products and interpretations of key SFDR distinctions/
              terms are the responsibility of financial market participants and should be discussed with your own legal counsel and your national competent authority as needed.
                                                                    Information Classification: GENERAL
Comparing MSCI ESG indexes using the framework
 based on client feedback explained in previous sections

                    E, S AND G CONSIDERATIONS IN METHODOLOGY                                                       Does it take into consideration Art. 6/8/9 key distinctions?
                                                                                             Governance                 Article 6 Key                Article 8 Key                      Article 9 Key
     Index        Environment Data Inputs                 Social Data Inputs
                                                                                             Data Inputs                Distinctions                 Distinctions                       Distinctions

                                                                                           • Controversy
                  • Climate exclusions                • Values exclusions                                                                        E/S                           ❑    Sustainable Objective
 SRI                                                                                         exclusion
                  • Controversy exclusion             • Controversy exclusion                                          E/S                       Characteristics               ❑    DNSH
 ESG Leaders                                                                               • Ratings
                  • Ratings exclusion &               • Ratings exclusion &                                             Safeguards              ❑ DNSH                          ❖    PASI
 ESG Focus                                                                                   exclusion &
                    selection                           selection                                                                                Good Governance                   Good Governance
                                                                                             selection

                  • Climate exclusions &
                    selection
                                                                                                                                                 E/S                               Sustainable Objective
                  • Carbon reduction
 Climate Paris                                        • Values exclusions                  • Controversy               E/S                       Characteristics                   DNSH
                  • Controversy exclusion
 Aligned                                              • Controversy exclusion                exclusion                  Safeguards               DNSH                          ❖    PASI
                  • Self-Decarbonization
                                                                                                                                                 Good Governance                   Good Governance
                  • Clean tech overweight
                  • 1.5˚C Alignment

                                                                                                                                                ❑ E/S                           ❑    Sustainable Objective
 Ex-                                                  • Values exclusion
                                                                                                                       E/S                       Characteristics               ❑    DNSH
 Controversial                n/a                       (Controversial                            n/a
                                                                                                                        Safeguards              ❑ DNSH                          ❖    PASI
 Weapons                                                Weapons)
                                                                                                                                                ❑ Good Governance               ❑    Good Governance

❖ At present, Principal Adverse Impact Indicators (PASI) are not taken into consideration in the analysis given lack of clearer guidance
❑ DNSH only applies if an Article 8 product is making sustainable investments, while it applies for all Article 9 products
For the descriptions of key concepts referenced, please refer to Slide 25.
                   The information is provided “as is” and does not constitute legal advice or binding interpretations of the SFDR. MSCI’s proposed approach to the key SFDR distinctions are based on
                   assumptions and client feedback as explained in this deck. Any designations of your Article 6, 8, and/or 9 products and interpretations of key SFDR distinctions/ terms are the responsibility of
                   financial market participants and should be discussed with your own legal counsel and your national competent authority as needed.
                                                                               Information Classification: GENERAL
Key concepts based on ESA’s Final Report on the draft RTS

• Environmental or social safeguards: “As regards investments that do not qualify as sustainable or as contributing to
 the environmental or social characteristics promoted by the financial product, financial market participants may decide to
 apply some baseline environmental or social safeguards such as those referred to in Regulation (EU) 2020/852.” (Final
 Report on the draft RTS, page 16)
• Environmental or social characteristics (applies to Article 8 / “light green” products): “Financial products that promote,
 among other characteristics, environmental or social characteristics, or a combination of those characteristics
 (environmental or social characteristics) cover various investment approaches and strategies, from best-in-class to
 specific sectoral exclusions.” (Final Report on the draft RTS, page 15)
• Sustainable investment objective (applies to Article 9 / “dark green” products): Financial products that follow Article
 2(17) definition of sustainable investment of the EU SFDR
• Good governance practices: As per the Final Report on the draft RTS, the definition for good governance should follow
 Article 2(17) of the EU SFDR – “in particular with respect to sound management structures, employee relations,
 remuneration of staff and tax compliance”
• DNSH: “DNSH reporting must also show whether the investments are aligned with the OECD Guidelines for Multinational
 Enterprises and the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the
 eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental
 Principles and Rights at Work and the International Bill of Human Rights.“ (Final Report on the draft RTS, page 9)

                                                 Information Classification: GENERAL
About MSCI

MSCI is a leading provider of critical decision support tools and services for the
global investment community. With over 50 years of expertise in research, data
and technology, we power better investment decisions by enabling clients to
understand and analyze key drivers of risk and return and confidently build more
effective portfolios. We create industry-leading research-enhanced solutions that
clients use to gain insight into and improve transparency across the investment
process. To learn more, please visit www.msci.com.

                                 Information Classification: GENERAL                 26
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